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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ---------- to ----------
Commission file number 0-10786
INSITUFORM TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3032158
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1770 Kirby Parkway, Suite 300
Memphis, Tennessee 38138
- ---------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 901-759-7473
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Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.01 par value
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(Title of class)
Indicate by a check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period as the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (Section 229.405 of this
chapter) is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information
state-ments incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
State the aggregate market value of the voting stock held
by non-affiliates of the registrant. The aggregate market value
shall be computed by reference to the price at which the stock was
sold, as of a specified date within 60 days prior to the date of
filing.
Aggregate market value as of March 15, 1997.....$116,968,123
Indicate the number of shares outstanding of each of the
registrant's classes of common stock as of the latest practicable
date.
Class A Common Stock, $.01 par value,
as of March 15, 1997................. 26,915,752 shares
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the documents, all or portions of which are
incorporated by reference herein, and the part of the Form 10-K
into which the document is incorporated: Proxy Statement to be
filed with respect to the 1997 Annual Meeting of Stockholders-Part
III.
PART I
ITEM 1. BUSINESS
GENERAL
Insituform Technologies, Inc. (the "Company") is a worldwide
provider of proprietary trenchless technologies for the
rehabilitation and improvement of sewer, water, gas and industrial
pipes. The Company's primary technology is the Insituform(R)
Process (the "Insituform Process"), a "cured-in-place,"
non-disruptive pipeline rehabilitation process that, during the
Company's most recent fiscal year, contributed approximately 70% of
the Company's revenues. The Insituform Process is based on a custom
manufactured polyester-fiber tubing, known as the Insitutube(R)
(the "Insitutube"), which forms a seamless, jointless and leak
resistant "pipe within a pipe." The Company believes the repaired
pipe, the Insitupipe(R) (the "Insitupipe"), is stronger and has
equal or greater flow capacity than the original pipe.
The Insituform Process has been used successfully for
approximately 26 years in the repair of sewers, tunnels and
pipelines throughout the world. The Company believes that the
Insituform Process offers many advantages over traditional "dig and
replace" methods of pipeline replacement. Such advantages include
installation without excavation, design and application
versatility, extension of the pipeline's useful life and speed of
installation. The Company believes that, under normal conditions,
sewer pipe repaired with the Insituform Process will generally have
a useful life in excess of 50 years.
In addition to the Insituform Process, the Company offers
certain other products in trenchless applications. The Company's
NuPipe(R) Process (the "NuPipe Process"), which utilizes a "fold
and formed" technology, is used primarily to repair smaller or less
damaged pipe and in situations where polyvinylchloride pipe is
preferred. The Company also exercises the exclusive rights in
substantially all of North America to the Paltem(R)-HL system and
certain other products (the "Ashimori Products"), which are in
various stages of development, under a license (the "Ashimori
License") from Ashimori Industry Co., Ltd. ("Ashimori"), and to the
Thermopipe(TM) System (the "Thermopipe Process"), under a license
from Angus Fire Armour Limited ("Angus"). The Company's Tite
Liner(R) Process (the "Tite Liner Process") and other abrasion and
corrosion protection technologies employ diameter-reduction
techniques tailored to meet the pressure pipe rehabilitation needs
of oil field, mining and industrial process pipelines. Through its
Affholder, Inc. subsidiary, the Company is engaged in trenchless
tunnelling used in the installation of new underground services.
The Company's products are marketed to governmental and
industrial customers primarily in North America and Western Europe,
and have also been introduced in South America, Eastern Europe, the
Middle East, Australia and the Pacific Rim. In the industrial
market, the Company focuses its marketing efforts on companies in
the pulp and paper, chemical, petrochemical, food and drug, and
nuclear power and utility industries.
Historically, the Company's primary business was to license
other companies to market and provide Insituform installation
services using the Company's proprietary technology in return for
royalties and product sales revenue from materials manufactured by
the Company. As a result of its acquisitions, the Company has
further integrated its business to perform the entire process of
manufacture and installation using its trenchless processes. The
Company intends to continue pursuing this integration strategy in
its principal markets. In other areas, the Company will continue to
emphasize marketing its products through license or joint venture
arrangements. The Company provides design assistance, marketing,
research and technical support to all its licensees in an effort to
stimulate demand for its products and to ensure a high standard of
quality control throughout the process.
The Company was incorporated in Delaware in 1980 under the
name Insituform of North America, Inc., in order to act as the
exclusive licensee of the Insituform Process in most of the United
States of Insituform Group Limited ("IGL"), the then owner of the
worldwide rights to the Insituform Process. Contemporaneously with
the consummation in 1992 of the Company's acquisition of IGL (the
"IGL Acquisition"), the name of the Company was changed to
Insituform Technologies, Inc.
In October 1995, Insituform Mid-America, Inc. ("IMA") which,
together with its subsidiaries, was licensed to provide the
Insituform technology in all or a portion of 22 states, was merged
with a subsidiary of the Company as a result of which IMA became a
wholly-owned subsidiary of the Company (the "IMA Merger"). The IMA
Merger and the IGL Acquisition have each been accounted for as a
pooling-of-interests and, accordingly, the consolidated financial
statements for the three years ended December 31, 1996 included in
response to "Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K" for the periods prior to the IMA Merger, and
(unless the context otherwise requires) all other financial
information included herein for such periods and prior periods,
include the combined historical results of the Company and,
respectively, IMA and IGL. The following acquisitions by the
Company, together with those of IMA, during the past six years have
been accounted for under the purchase method of accounting, so that
the results of the acquired companies are included in the Company's
historical results of operations from the consummation of such
transactions, respectively:
Date Company Acquired Principal Business
- ---- ---------------- ------------------
November 1995 FormaPipe Division, cured-in-place pipe-
Waterflow Services Limited line rehabilitation,
United Kingdom
April 1995 Enviroq Corporation Insituform and NuPipe
(pipeline rehabilitation licensee, southeast
business, including U.S. territories
Insituform Southeast, Inc.)
February 1995 Insituform France S.A.(1) Insituform licensee,
France
October 1994 Gelco Services, Inc. and Insituform and NuPipe
affiliated entities licensee, Pacific
Northwest territories
July 1993 Insituform Midwest, Inc. Insituform and NuPipe
licensee, midwestern
territories
July 1993 Naylor Industries, Inc. Insituform and NuPipe
(parent of Insituform licensee, Gulf coast
Gulf South, Inc.) territories
December 1992 H.T. Schneider, Inc. Insituform and NuPipe
(parent of Insituform of licensee, New England
New England, Inc.)
December 1992 Insituform Technologies Insituform and NuPipe
Limited(2) (formerly, licensee, Canada(3)
Insituform Canada Limited)
November 1992 Pipeline Rehabilitation Paltem licensee
Systems, Inc.
October 1991 United Pipeline Systems, Tite Liner installer,
Inc. (including stock Canada
of United Corrosion Cor-
poration, its parent)
April 1991 Insituform Southwest(4) Insituform and NuPipe
licensee, south-
western U.S.
territories
March 1991 United Pipeline Systems Tite Liner installer,
USA, Inc. U.S.
___________________
(1) two-thirds of stock acquired
(2) remaining 49% minority interest acquired
(3) effective October 1995, Insituform Canada Limited divested its open-cut
sewer and water pipeline construction and rehabilitation operations
(4) remaining two-thirds interest acquired
As used in this Annual Report on Form 10-K, the term the
"Company" refers to the Company and, unless the context otherwise
requires, its direct and indirect subsidiaries. For certain
information concerning each of the Company's industry segments and
domestic and foreign operations, see Note 16 of the Notes to the
Company's Consolidated Financial Statements included in response to
"Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K," which information is incorporated herein by reference.
TECHNOLOGIES
Pipeline System Rehabilitation
The Insituform Process. The Insituform Process for the
rehabilitation of sewers, pipelines and other conduits utilizes a
tubing made of a synthetic fiber felt, the Insitutube, which is
constructed with a strong, smooth, watertight plastic coating on
the outside. The Insitutube is custom manufactured to the diameter,
length and other characteristics of the pipe, sewer or conduit to
be repaired.
A pipe to be repaired is first cleaned by removing tree roots
and other debris and a remote-controlled video camera is inserted
into the pipe to inspect it and in order to make a recording of the
location of the lateral connections for use in subsequent
re-opening of the connections. If necessary, the section of pipe to
be rehabilitated is bypassed from the balance of the pipeline
system. Services to users in the affected section are usually not
disconnected but usage may be curtailed to prevent excess back-up
in the lateral connections.
In the case of a typical sewer pipe to be repaired by the
Insituform Process, access is gained through an existing manhole.
Prior to the installation, the Insitutube is saturated throughout
its length with a thermosetting liquid resin. In most cases, the
Insitutube is installed using pressure from a column of water
maintained inside an inversion tube, and the Insitutube is turned
inside out and advanced through the pipe to be repaired with the
resin-saturated surface held against the surface of the existing
pipe. The smooth-coated side of the Insitutube forms the new
interior surface of the pipe. After the Insitutube is fully
extended through the pipe to be repaired, the water inside the
Insitutube is heated to a prescribed temperature in order to cause
the thermosetting liquid resin to harden, or cure. Essentially, the
Insituform Process creates a "pipe within a pipe," the Insitupipe.
Each end of the Insitupipe is cut off at the manhole walls and the
flow is re-established.
During the installation of the Insitutube, smaller lateral
lines feeding into the existing pipe are temporarily blocked.
Lateral lines are side connecting pipes, typically between four and
six inches in diameter, which discharge flow from homes and
businesses into the main pipe undergoing repair. To complete the
installation, the Insitupipe must be cut, or routed out, at the
lateral junctions to re-establish the flow from these laterals. A
remote-controlled cutter, the Insitucutter(R), and a video camera
are inserted into the pipe and used to open the lateral lines into
the pipe. The Company's lateral rehabilitation service includes the
cleaning, inspection, evaluation and rehabilitation of laterals,
utilizing the Insituform Process.
The NuPipe Process. The NuPipe Process entails the manufacture
for the Company of a folded replacement pipe from a thermoplastic
material which is stored on a reel in a reduced shape. The pipe is
heated at the installation site in order to make it flexible enough
to be inserted into an existing conduit, pulled into place and then
sequentially expanded to match the existing conduit by internal
heat and pressure and progressive rounding, creating a tight fit
against the conduit being repaired. In this position, the now
expanded NuPipe is subjected to internal pressure, and cooled to
create a new pipe for permanent installation, with lateral
connections then cut from within.
The NuPipe Process requires little or no excavation for
installation. In addition, the NuPipe Process does not materially
reduce the diameter of the existing pipe and minimizes the annular
space between the new rounded pipe and the original pipe. Because
the pipe is tight-fitting and jointless, flow capacity in most
cases is at least equal to that of the existing pipe, or is
improved. The NuPipe Process involves manufacture of pipe in
continuous lengths of standard pipe diameters, rather than custom
manufacture for specific applications, as is the case with the
Insituform Process, making it suited for small-diameter pipes.
Ashimori Products. The Paltem-HL system is a process for
rehabilitating pressure pipes, which the Company has the exclusive
license from Ashimori to offer in substantially all of North
America. The system utilizes a woven polyester hose with an
elastomer coating called a PAL-Liner(TM), which is custom-
manufactured to the dimensions of the pipe to be rehabilitated.
Prior to installation, the PAL-Liner hose is coated with epoxy
resin. Compressed air or other suitable means is then used to
invert and propel the PAL-Liner through the pipe from an access
pit. After the PAL-Liner reaches a receiving pit, the resin hardens
and the PAL-Liner forms a smooth, pressure resistant lining on the
inside surface of the pipe.
In addition to the Paltem-HL system, the Ashimori License
provides for the rights to utilize, manufacture and sell the
following Ashimori Products, which are in various stages of
development: (i) the Paltem-Apollo(TM) system, a process for point
repair by pulling a specially designed robot together with Apollo-
Liner into the pipe, inflating and light-curing the liner to form
a new rigid pipe at the spot to be repaired, including a system for
forming a new pipe at the point of connection of the lateral to the
main pipe and reconnecting the lateral; (ii) the Paltem-Frepp(TM)
system, a process for restoration of pipes by pulling a partially
folded Frepp-pipe into the pipe and reforming it to form a new pipe
within the pipe; (iii) Paltem-March(TM) products, which are non-
woven fiber tubes with a seamless coating used in pipeline
rehabilitation; and (iv) the Paltem-SZ(TM) system, a process for
restoration of sewer pipes by pulling SZ-Liner into the pipe,
inflating, and forming a new rigid pipe within a pipe utilizing
heat-curing resin applied to the liner.
The Thermopipe Process. The Thermopipe Process is a
trenchless process which the Company intends to introduce for
rehabilitating potable water and other aqueous fluid pipes. During
the third quarter of 1996, the Company acquired an exclusive
license from Angus to offer the Thermopipe Process in the United
States and Canada, and non-exclusive rights to offer the Thermopipe
Process in certain other countries (see "Patents and Licenses"
below). The process utilizes a thin-walled polyethylene liner
reinforced with a woven textile fiber, which is manufactured in
diameters that conform to the inside diameters of commonly used
water pipes, currently up to six inches in size. As a result of its
high long-term, independent internal pressure rating, the
Thermopipe liner is suited for the structural rehabilitation of
distribution mains made from most common materials. The factory-
folded pipe is stored on reels and, after insertion into the host
pipe, re-rounded by use of steam and air pressure to conform to the
inside of the pipe. End seals are then installed before the pipe is
placed back into service.
Corrosion and Abrasion Protection
The Company's Tite Liner Process is a method of lining
pipelines with a corrosion and abrasion resistant pipe in order to
extend system life. Oil field, natural gas distribution lines and
certain industrial process systems typically utilize steel pipe,
which is subjected to highly corrosive fluids and gases, while
slurry lines used in mining operations are subjected to highly
abrasive flows. The Tite Liner Process utilizes a polyethylene
liner which is diameter-reduced in a roller box and then pulled
through a steel pipe. When the pulling tension is released, the
liner expands to create, after a period of "relaxation", a tight
fit against the host pipe's inner wall. After installation, the
ends of the polyethylene pipe are finished by formation of a
flange.
Tunnelling
Tunnelling is a trenchless, subterranean construction process
that generally is utilized for the construction of pipeline
systems. In the Company's tunnelling operations, the crew first
digs a work shaft and then constructs the tunnel, installs pipe in
the new tunnel and fills the annular space around the newly-
constructed pipeline with grout. The Company utilizes seven
tunnelling machines to construct two to fourteen-foot diameter
tunnels into which pipes are inserted. Four of the Company's large
diameter tunnelling machines are state-of-the-art, earth-pressure-
balanced tunnelling machines, designed to reduce costs and risks of
subsidence, and improve competitiveness, by virtue of the ability
to tunnel without de-watering the surrounding soils, and two other
machines operated by the Company are capable of mining in hard
rock.
DIRECT INSTALLATION AND OTHER CONSTRUCTION ACTIVITIES
The Company's direct installation operations utilizing the
Insituform Process and its other construction activities accounted
for approximately 93% of the Company's consolidated revenues in
1996. Such operations are conducted in North America principally
through subsidiaries which hold the Insituform Process and NuPipe
Process licenses for 41 of the 50 states (and a portion of another
state), in addition to Puerto Rico and the U.S. Virgin Islands, and
all of Canada, and the rights in substantially all of North America
to the Paltem system and certain other products under a license
from Ashimori and to the Thermopipe Process under a license from
Angus. Outside of North America, the Company conducts Insituform
Process or NuPipe Process direct installation operations through
its subsidiaries in the United Kingdom and France.
The worldwide rights to the Tite Liner Process are applied by
United Pipeline Systems USA, Inc. and, through its United Pipeline
division, Insituform Technologies Limited ("Insituform Canada"),
both subsidiaries of the Company. During 1994, Tite Liner
operations commenced in Chile through a newly-organized subsidiary,
United Sistema de Tuberias Ltda. ("United Chile"), and during 1996,
through newly organized subsidiaries in Argentina and Mexico.
Following consummation of the IMA Merger, and in view of the start-
up nature of operations conducted by the Company under the
UltraPipe(R) name, the Company has consolidated such operations
with IMA's larger corrosion and abrasion protection activities.
Direct trenchless installation operations are organized into
field installation and construction crews. Each Insituform and
NuPipe field unit is typically composed of crews responsible for
cleaning and preparation, installation, and video/cutter
operations, and is equipped with a high-pressure- water cleaning
truck, a television van with cutting apparatus, other support
trucks and vans, pumping and safety equipment and, in the case of
Insituform operations, a boiler truck and a refrigeration truck,
and, in the case of NuPipe operations, a spool trailer and power
unit. Each Paltem crew is typically equipped with a turning truck,
resin mixers, pulling machine and other supporting trucks and
equipment. Installation crews engaged in the Company's corrosion
and abrasion protection work are typically equipped with a wire
line unit, roller boxes, fusion machines, a spool trailer, pickup
trucks and other supporting trucks and equipment. The Company is
formulating its plan to introduce the Thermopipe Process since its
acquisition of the rights to use such process during the third
quarter of 1996.
The Company's Affholder, Inc. subsidiary offers a broad range
of traditional pipe rehabilitation and construction services,
including tunnelling, point repairs, shaft work and pipe cleaning.
Effective in 1995, Insituform Canada sold the assets utilized in
its multi-service, open-cut sewer and water pipeline construction
and rehabilitation operations to certain members of its management,
after transferring its micro-tunnelling equipment to Affholder,
Inc.
The direct installation business of the Company is
project-oriented, and contracts may be obtained through competitive
bidding, usually requiring performance at a fixed price. The
profitability of these operations to the Company depends upon the
ability to estimate costs accurately, and such estimates may prove
to be inaccurate as a result of unforeseen conditions or events. A
substantial proportion of the work on any given project may be
subcontracted out to third parties by the Company.
Proper trenchless installation requires certain expertise that
is acquired on the job and through training, and, if an
installation is improperly performed, the Company may be required
to repair the defect, which may involve excavation. The Company,
accordingly, has incurred significant costs in establishing new
field installation crews, in training new operations personnel and
in equipping its direct installation staff. The Company generally
invoices installation revenues on a percentage-of-completion basis.
Under ordinary circumstances, collection from governmental agencies
in the United States is made within 60 to 90 days of billing.
The Company is required to carry insurance and bonding in
connection with certain direct installation projects, and,
accordingly, maintains comprehensive insurance policies, including
workers' compensation, general and automobile liability, and
property coverage. The Company believes that it presently maintains
adequate insurance coverage for all direct installation activities.
The Company has also arranged bonding capacity for bid, performance
and payment bonds. Typically, the cost of a performance bond is
approximately 1% of the contract value. The Company is required to
indemnify surety companies for any payments the sureties are
required to make under the bonds.
The Company's principal direct installation and other
construction activities are conducted by direct or indirect wholly-
owned subsidiaries, except for the following subsidiaries that are
less than wholly-owned:
Subsidiary Processes Territory Interest
---------- --------- --------- --------
United Sistema de Tite Liner Chile(1) 60% of
Tuberias Ltda. stock(2)
United Pipeline Tite Liner Mexico(1) 55% of
de Mexico, S.A. stock(3)
Insituform France Insituform France 66-2/3% of
S.A. stock(4)
Midsouth Partners Insituform Tennessee, 57-1/2%
NuPipe portions of general
Kentucky and partnership
Mississippi interest(5)
_______________________
(1) Jurisdiction of incorporation.
(2) The remaining interest is held by Inversiones Bellavista S.A. ("IBS"). The
Company's arrangements provide for IBS' option to purchase an additional
10% of the equity of United Chile upon terms to be defined.
(3) The remaining interest is held by a subsidiary of Produtos y Servicios
Miller de Mexico, S.A.
(4) The remaining interest is held by a subsidiary of Lyonnaise des Eaux S.A.
(5) The Company holds a 15% partnership interest through Insituform Southwest,
Inc. ("ISW"), a wholly-owned subsidiary, and, as a result of the IMA
Merger, an additional 42.5% interest through a wholly-owned subsidiary of
Insituform Southeast, Inc. ("Insituform Southeast"). The remaining
interest is held by a subsidiary of Insituform East, Incorporated
("Insituform East"), an independent licensee.
Partnership interests in Midsouth Partners may not be
transferred nor may there be a change in control of any partner,
without the approval of all partners. The management and conduct of
the business of Midsouth Partners is vested in a management
committee comprised of seven members. In June 1996, the arbitration
panel in proceedings initiated by the Insituform East subsidiary
holding a Midsouth Partners partnership interest determined the
Insituform Southeast subsidiary holding such interest, but not ISW,
was in default of its obligations under the Midsouth Partners
partnership agreement and that as a consequence thereof, the
Insituform East subsidiary had the right to appoint a
representative to the management committee, in place of one of the
three representatives appointed by the Insituform Southeast
subsidiary and in addition to the three members previously
appointed by the Insituform East subsidiary and the one member
appointed by ISW.
MANUFACTURING AND PRODUCT SALES
The Company's manufacturing and product sales operations
accounted for approximately 6% of the Company's consolidated
revenues in 1996. Product sales to licensees acquired by the
Company are, under the purchase method of accounting, eliminated
from the Company's consolidated revenues subsequent to the
respective acquisitions of such licensees by the Company. In
addition, as a result of accounting for the IMA Merger as a
pooling-of-interests, product sales to IMA are eliminated for all
periods including those prior to such transaction.
Although the Company's Insituform license agreements typically
contain no requirement that licensees purchase equipment or
materials from the Company, the Company sells Insitutubes and
related products utilized in the Insituform Process pursuant to
supply contracts with its domestic Insituform licensees. Under the
current term of the Company's domestic supply arrangements, the
licensee purchases from the Company a specified percentage (60% or
90%) of its Insitutube requirements, unless excused in certain
circumstances, subject to minimum annual purchases by the buyer and
maximum required sales by the Company. Prices under such contracts
are fixed, subject to limited annual increases by the Company. Such
contracts are renewable on an annual basis.
In Europe, Insituform Linings Plc ("Linings"), a joint venture
between the Company and five licensees, manufactures and sells
Insitutube linings. The Company owns 51% of the equity of Linings.
In 1992, the Company inaugurated its Insitutube manufacturing
facility in Matsubuse, Japan.
The Insitutube is manufactured by the Company in varying
lengths, diameters and thicknesses to accommodate the requirements
of each specific installation. The average lead time necessary to
produce the custom manufactured Insitutube varies from one to two
weeks depending principally on the length, thickness and diameter
required. The Company maintains an inventory of the plain and
coated materials used in the manufacture of Insitutubes and a small
inventory of the most common diameters and thicknesses of
Insitutubes.
While raw materials used in the Company's Insituform products
are typically available from multiple sources, the Company's
historical practice has been to purchase the Insitutube materials
from a limited number of suppliers. The Company maintains its own
felt manufacturing facility contiguous to its Insitutube
manufacturing facility in Batesville, Mississippi. The Company
believes that resins are readily available from a number of major
corporations. The Company believes that the sources of supply in
connection with its Insituform operations are adequate for its
needs and that currently it is not substantially dependent upon any
one supplier.
In connection with the introduction of the NuPipe Process,
each domestic licensee has entered into supply agreements pursuant
to which the licensee is required to purchase from the Company all
of its requirements for the thermoplastic pipe utilized in the
application of the NuPipe Process. Prices under each supply
agreement are subject to limited increases by the Company. Each
supply agreement is automatically renewed for successive periods of
two years each, unless the licensee exercises a non-renewal option,
which is available if the Company's quality and prices are not
competitive with commercially practicable alternative sources. The
Company has not received notice of exercise of any such non-renewal
option.
The Company has entered into a supply agreement with an
unaffiliated party, under which the Company will purchase pipe to
satisfy no less than 90% of specified formulations of its
licensees' NuPipe requirements through the end of 1998, subject to
automatic renewal unless one party terminates upon at least twelve
months' prior notice and to minimum purchases by the Company. The
Company believes that alternative sources of supply for its pipe
requirements in connection with the NuPipe Process are available.
If the Company were unable to obtain its NuPipe requirements under
its existing third party arrangements, the Company might be
adversely affected until arrangements with alternative sources are
formulated.
The Company will continue to purchase the PAL-Liner it uses
from Ashimori. Pursuant to its license to the Thermopipe Process,
the Company will purchase the Thermopipe product and associated
components from Angus.
The Company manufactures certain equipment used in its
corrosion and abrasion protection operations, and, in connection
with any licenses to unaffiliated parties, will sell such equipment
to its licensees.
LICENSING OPERATIONS
The Company grants licenses for the Insituform Process,
covering exclusive and non-exclusive territories, to licensees who
provide sewer and pipeline repair and rehabilitation services to
governmental, industrial and commercial users throughout their
respective licensed territories. The licenses generally grant to
the licensee the right to utilize the know-how and practice the
invention of the patent rights (where they exist) relating to the
Insituform Process, to use the Company's copyrights and to use the
trademark "Insituform."
During 1996 the Company entered into one new Insituform
license agreement covering an additional territory and, at present,
the Insituform Process is commercialized under license by an
aggregate of 34 unaffiliated licensees and sublicensees. From time
to time, in those territories which do not justify the granting of
a license, the Company also appoints agents which promote the
Insituform Process and secure contracts to be performed by the
Company or its licensees. During the year ended December 31, 1996,
license fees and royalty income from the Company's Insituform
licensees represented approximately $5.4 million, or approximately
2% of consolidated revenues. Royalties from licensees acquired by
the Company are eliminated from the Company's consolidated revenues
subsequent to the respective acquisitions of such licensees by the
Company. In addition, as a result of accounting for the IMA Merger
as a pooling-of-interests, royalties from IMA are eliminated for
all periods including those prior to such transaction.
Effective in December 1990, NuPipe, Inc., a wholly-owned
subsidiary of the Company, entered into licenses granting the
exclusive right to commercialize the NuPipe Process in assigned
territories covering the United States. NuPipe International, Inc.,
a wholly-owned subsidiary of NuPipe, Inc., has entered into a
number of licensing arrangements outside of the United States.
During the year ended December 31, 1996, the Company recognized
royalty income from its NuPipe licensees in an amount less than 1%
of consolidated revenues.
Pursuant to the Ashimori License, the Company is obligated to
enter into a license granting to Ashimori the exclusive right to
use the Tite Liner Process in Japan, in exchange for royalties of
7% on installations. During 1996, the Company also granted an
exclusive license to use the Tite Liner Process for specified uses
in much of the Middle East, in exchange for royalty payments
calculated on the basis of the licensee's gross sales (subject to
minimum payments). As a result of the Company's acquisition during
1994 of certain territories initially reserved by the seller of the
UltraPipe technologies, the Company assumed the seller's
obligations under the grant of an exclusive license of such
technologies for much of the Middle East.
Insituform License Agreements
Each licensee has entered into an agreement with the Company
setting forth the rights and obligations of the parties with
respect to the exploitation of the Insituform Process. Each of the
Company's domestic Insituform licensees (including its unaffiliated
licensees, which hold the rights to use the Insituform Process in
eight states and a portion of another state) pays a minimum annual
royalty, which varies according to the population of the licensed
territory, against a royalty of 8% of the gross contract price of
all sales and contracts utilizing the Insituform Process, including
any preparatory and finishing work performed and subject to
specified allowances. Domestic licensees are also obligated to pay
a royalty surcharge of 8% to 12% of their sales and contracts
utilizing the Insituform Process outside of their licensed
territories. The amount of such surcharges are then paid by the
Company to the domestic licensee in whose territory the
installation was performed.
In the event any domestic Insituform licensee has, for any
year, produced to the Company an acceptable plan for marketing and
sales penetration, minimum royalties otherwise established for such
year will not apply, subject to achievement of performance
objectives established with respect to utilization of the Company's
trenchless rehabilitation processes. In addition, the Company is
obligated to pay to Insituform East one-half of one percent of the
gross contract value of certain contracts using the Insituform
Process entered into by licensees introduced to the Company by
Insituform East's predecessor-in-interest, SAW Associates.
Insituform licensees outside of the United States are
obligated to pay royalties, calculated by reference to the gross
contract price of all contracts utilizing the Insituform Process,
ranging from 5% to 8%. Foreign licenses may also provide for
minimum annual royalties as well as initial license fees and
trademark fees.
The Company requires its licensees to be well-trained and
fully qualified in the installation and service of the Insituform
Process. The Company typically establishes certain financial,
professional and operating requirements which must be met by each
licensee. In addition to possessing adequate capital and competent
technical personnel each licensee must demonstrate an ability to
market the Insituform Process aggressively to potential users
within its territory.
Any improvements or modifications a licensee may make in the
Insituform Process during the term of the license agreement becomes
the property of the Company or are licensed to the Company. The
Company is generally required to disseminate all information with
regard to the Insituform Process developed by it or any licensee to
all licensees, without any additional royalty.
Should a licensee fail to meet its royalty obligations or
other material obligations, the Company may terminate the license.
Many licensees (including the domestic licensees), upon prior
notice to the Company, may also terminate the license for any
reason. The Company may vary the agreement used with new licensees
according to prevailing conditions.
NuPipe Process License Agreements
In consideration for its NuPipe license, each domestic NuPipe
licensee (including its unaffiliated licensees, which hold the
rights to use the NuPipe Process in eight states and a portion of
another state) paid an initial license fee of $60,000 and agreed
thereafter to pay a royalty of 6.75% of the gross contract price
(including sales) of all contracts to the extent covering
installations performed utilizing the NuPipe Process. "Gross
contract price" is defined to include preparatory and finishing
work and does not exclude certain allowances as does the comparable
calculation utilized by the Company for domestic Insituform
royalties. If the licensee commercializes the NuPipe Process
outside of its assigned territory, it will be obligated to pay to
the Company, for repayment in turn to the licensee assigned such
territory, 10.125% of the gross contract price of such
installations. In connection with its introduction in 1995 of a
second fold and formed product, the Company has offered domestic
licensees the right to elect to modify royalty calculations so as
to be based upon linear feet of pipe delivered, but has not
completed such arrangements with its unaffiliated licensees.
Each domestic NuPipe licensee has committed to use its best
efforts to create a demand for the NuPipe Process within the
territory covered by its license and to use its best efforts to
fill such demand. In furtherance of its commitments under the
license, each domestic licensee has agreed that in order to
maintain the license it will, during each year of the term of the
license, complete contracts covering the repair, rehabilitation or
reconstruction in its territory of the minimum quantities of length
of pipeline as established under the license, by utilizing certain
of the Company's trenchless rehabilitation processes.
Each domestic licensee has, pursuant to its license, entered
into a supply agreement with the Company relating to its
requirements of the thermoplastic pipe utilized in the application
of the NuPipe Process, as described under "Manufacturing and
Product Sales" above. Domestic NuPipe licensees are subject to
terms similar to those in the Company's Insituform licenses with
respect to maintenance of quality standards, rights in improvements
to the process and termination of the license.
The Company has entered into licensing arrangements covering
Sweden, Switzerland and Germany, and also, through subsidiaries,
introduced the NuPipe Process in the United Kingdom, France and
Canada. In consideration for its NuPipe license, each unaffiliated
foreign NuPipe licensee has paid an initial license fee, and each
foreign licensee remains obligated to pay a royalty of 8% of its
net invoices in connection with the operation of the NuPipe Process
in its exclusive territory, subject to minimum royalty payments,
throughout the life of the 20-year agreements or pay a royalty on
product ordered. Under the agreements, the licensees have committed
to use their best efforts to promote the operation of the NuPipe
Process in their respective territories, but may, upon six months
prior notice, terminate the license. The licensor may also
terminate the license in the event the licensee fails to make
payments when due or fails to meet its other material obligations.
Foreign licensees have granted to the licensor a non-exclusive,
royalty free license, without limit of time, covering all
improvements to the NuPipe Process that the licensees may develop
or acquire.
INVESTMENTS IN LICENSEES
The Company makes investments in its licensees, and enters
into joint ventures, from time to time to encourage additional
royalties and sales of its products and further enable the Company
to influence and participate in the exploitation of its trenchless
rehabilitation processes. During the three years ended December 31,
1996, the Company did not record earnings from any such investment
that were material to the Company's results of operations. See Note
6 of the Notes to the Company's Consolidated Financial Statements
included in response to "Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K."
The Company, through its subsidiary, Insituform Holdings (UK)
Limited ("Holdings"), holds one-half of the equity interest in
Insituform Rohrsanierungstechniken GmbH ("Insituform Germany"), the
Company's licensee of the Insituform and NuPipe Processes in
Germany. Under the joint venture arrangements, the managing
director of Insituform Germany is appointed by the agreement of the
parties, and the joint venture partners have rights--
of-first-refusal in the event any party determines to divest its
interest.
The Company holds additional investments in licensees as
follows:
Licensee Processes Territory Interest
- -------- --------- --------- --------
N.V. K-Insituform S.A. Insituform Belgium, 50% joint venture
Luxembourg interest(1)
Ka-Te Insituform A.G. Insituform Switzerland, 50% joint venture
Liechtenstein and interest(2)
Voralberg, Austria
_____________________
(1) The remaining interest is held by N.V. Kumpen.
(2) The remaining interest is held by Ka-Te Holding A.G.
The interests in the Company's Belgian joint venture and its
Swiss joint venture, both formed in 1993, are subject to its
partners' right-of-first-refusal. The Company's joint venture in
Belgium is managed by four directors, two named by the Company, who
are responsible for technical and financial matters, and two named
by N.V. Kumpen, who are responsible for marketing, sales and
general management. The Company's Swiss joint venture is managed by
three directors, with unanimity required of the directors, or of
the shareholders, to take certain actions. Of the directors of the
Swiss joint venture, one is named by Ka-Te Holding A.G., who is
responsible for marketing, sales and general management, one is
named by the Company, who is responsible for technical and
financial matters, and a third is named by the Company with the
approval of its partner, which may not unreasonably be withheld.
Until March 1995, the Company was also a party to a joint
venture, called Enhansco, which develops, blends and sells resins
used in connection with the Insituform Process. At such date, the
Company's joint venture partner purchased the Company's one-half
interest in the joint venture for the sum of $400,000, one-half of
which was paid within 30 days of closing and the remainder of which
is due on December 31, 1997. The Company has agreed that it will
not compete in certain respects with the continuing resin business
of the joint venture for a period of three years after such
buy-out.
MARKETING
The Company markets its technologies primarily to the municipal
wastewater and industrial markets worldwide and natural gas
distribution market in North America. The Company's product
managers and engineers develop strategies and design products
intended to meet the needs of customers in each of these markets.
In addition, the Company produces sales literature and
presentations, participates in trade shows, conducts national
advertising and executes other marketing programs for the Company's
own sales force and those of unaffiliated licensees. The Company's
unaffiliated licensees are responsible for marketing and selling
the Company's trenchless rehabilitation processes in their
respective territories, and each has a staff for that purpose.
The municipal wastewater market has historically represented
the single largest segment for the Company's trenchless
rehabilitation services. The Company expects this segment to remain
the largest part of its business for the foreseeable future. In
response to competition from other providers of trenchless
technologies, the Company's strategy is to differentiate its
products based on design and performance benefits. The Company
attempts to build long-term relationships with its customers for
the utilization of the Company's complete line of rehabilitation
products and services. The Company utilizes its own sales force (or
that of unaffiliated licensees) with a view toward having its
technologies permitted or required in bid specifications.
The Company believes that the industrial market represents
significant opportunities for the use of the Company's trenchless
rehabilitation products and services. The Company's processes are
used to stop leakage in difficult-to-access pressurized pipes,
achieve containment of industrial effluents and restore structural
integrity to underground wastewater and storm sewers. In areas not
directly served by the Company, the Company's unaffiliated
licensees are responsible for marketing and selling the Company's
products to the industrial market.
The Company believes that its tunnelling operations strengthen
its relationships with its customers by positioning the Company as
a problem solver for pipeline systems and enhance its capacities to
perform large-diameter installations of the Insituform Process.
The Company has the right to market the Paltem-HL hoselining
system in substantially all of North America to natural gas
distribution companies, in order to renew both mains and services
connections which are suffering from the effects of corrosion or
similar deterioration. The Company currently utilizes its own sales
representatives who work with gas companies in selected areas to
educate them about the advantage of using the Company's trenchless
technologies.
The Company offers the Tite Liner system worldwide for use in
oil and gas field systems, which typically utilize steel pipe that
is subjected to highly corrosive fluids and gases, and in mining
slurry lines, which typically are subjected to highly abrasive
flows. The Company believes that customers in the oil and gas and
mining markets will continue to look for ways to improve and extend
the useful life of their facilities rather than to replace their
existing pipelines.
The Company expects to continue licensing the Insituform
Process and the NuPipe Process pursuant to existing arrangements
and in those additional areas of the world in which the Company's
management believes it would not be profitable for the Company to
exploit such processes directly. The Company intends to continue to
investigate the formation of subsidiaries and other affiliates,
including joint ventures, which will directly provide installation
services utilizing the Company's processes.
No customer accounted for more than ten percent of the
Company's consolidated revenues during the years ended December 31,
1996, 1995 and 1994, respectively.
BACKLOG
Orders for Insitutubes are generally shipped within one to two
weeks after receipt, and, accordingly, no substantial backlog of
orders for this product normally exists.
At December 31, 1996 and 1995, respectively, the Company
recorded backlog from construction operations (including projects
where the Company has been advised that it is the low bidder) in
the amounts of approximately $177.3 million and $134.1 million,
respectively. Of such amounts, approximately $9.7 million and $25.6
million, respectively, represent projects where the Company was the
low bidder. Backlog at December 31, 1996 and December 31, 1995
included approximately $28.6 million and $11.1 million,
respectively, attributable to the Company's corrosion and abrasion
protection operations (primarily involving the application of the
Tite Liner Process) and approximately $39.7 million and $16.2
million, respectively, attributable to tunnelling operations. The
Company anticipates that substantially all construction backlog
recorded at December 31, 1996 will be completed in 1997, except
for amounts aggregating approximately $25.6 million, which the
Company anticipates will be completed the following year.
SEASONALITY
Although severe cold weather affects the Company's operations
in Canada in the months of December, January, February and March
(where, over the past three years, the volume of work performed in
the first calendar quarter has averaged 8% of the total year's
work), the volume of work reported on a consolidated basis by the
Company's licensees (including affiliated licensees) in the first
calendar quarter of the year has averaged, for the past five years,
approximately 24% of the work they reported over the full year.
COMPETITION
The pipeline reconstruction, rehabilitation and repair business
is highly competitive, and the Company competes against many
companies, some of which have far greater financial resources and
experience than the Company. Accordingly, there can be no assurance
as to the success of the Company's processes in competition with
such companies and alternative technologies for pipeline
rehabilitation.
In each of its rehabilitation markets, the Company currently
faces competition from more conventional methods, including: (i)
total replacement, which is the excavation and replacement of an
entire section of pipe; (ii) point repair, which is the replacement
of cracked or structurally failed sections of pipes by actual
excavation and replacement; (iii) sliplining, which is the
insertion of a smaller pipe within an existing deteriorated pipe;
and (iv) the placement of gelatinous material, hydraulic cement, or
other acceptable material in defective pipes to repair leaks and
prevent infiltration in gravity sewers.
In addition, the Company faces competition from other
trenchless processes throughout the world. In the United States,
the Company faces competition from several cured-in-place processes
and, outside of the United States, from additional cured-in-place
processes currently in regional use. The Company also faces
competition from several fold and formed thermoplastic processes.
Several companies offer in-place polyethylene lining systems which
compete with the Company's abrasion and corrosion protection
technologies. The Company's trenchless processes may also encounter
competition from alternative trenchless approaches such as pipe
bursting and other methods.
The Company's tunnelling operation competes with utility
contracting firms throughout North America.
PATENTS AND LICENSES
The Insituform Process was developed in the United Kingdom in
1971. The Company's commercialization of the Insituform Process has
been protected by patents which cover certain aspects of the
Insituform Process including the Insitutube construction, the resin
saturation process and the process of reconstructing the pipeline.
Pursuant to provisions recently adopted under the General Agreement
on Tariffs and Trade, patents in force on June 8, 1995 will be
entitled to a patent term of the longer of 17 years from issuance
or 20 years from the earliest filing date of the patent. The
Company currently holds 59 patents in the United States relating to
the Insituform Process, the last to expire of which will remain in
effect until 2014, and has obtained patent protection in its
principal overseas markets covering aspects of the Insituform
Process.
Two of the significant patents relating to the Insituform
Process, covering, respectively, the curing of a resin-impregnated
tube and material aspects of the inversion process, have expired
where previously in effect. The following patents of the Company
relate to the Insituform Process, collectively constituting an
integrated product and service:
Expiry Expiry Expiry Expiry
Patent U.S. Date Canada Date Japan Date U.K. Date
------ ---- ------- ------ ------ ----- ------ ---- -------
(a) 4366012 02/05/01 -- -- -- -- -- --
(b) 4434115 02/11/02 -- -- -- -- 2096265 02/18/01
(c) 4446181 05/01/01 1134290 10/26/99 1202781 07/18/98 2031107 09/20/99
(d) 4581247 01/05/04 1254852 05/30/06 -- -- -- --
(e) 4776370 10/11/05 -- -- -- -- -- --
(f) 5044405 08/21/09 -- -- -- -- -- --
(g) 5108533 10/10/09 -- -- -- -- -- --
(h) 5154936 10/05/10 * * * * 0504343 09/19/11
(i) 5167901 10/05/10 -- -- -- -- -- --
(j) 5384086 01/24/12 * * * * 0511260 01/16/11
(k) 5407630 04/18/12 * * * * 0464121 03/19/10
(l) 5510078 04/23/13 * * -- -- * *
_____________
(a) method of serial vacuum impregnation of a resin into an Insitutube.
(b) method for remote lining of side connections.
(c) manufacture of tubular laminates.
(d) method for lining pipes incorporating the curing of a resin-impregnated
liner using a light source.
(e) apparatus for securing cable to a tubular pipe liner.
(f) method of installing a lateral lining from the main line by use of a
carrier tube.
(g) method of installing a lateral lining from the lateral clean-out to the main.
(h) apparatus for everting an Insitutube.
(i) method of everting an Insitutube.
(j) method of lining pipelines by inverting a tube against a moveable backstop.
(k) method of lining pipelines using a sealed inversion process.
(l) method of inverting a tube with the use of a rolling ring.
* application pending
/TABLE
In addition, in Germany applications for patents (h), (i) and (j)
are pending, and an application for patent (d) has been abandoned.
In the United Kingdom, in respect of certain classes of patents,
any person has the right to compel the patent holder to license
such person during the last four years of the patent's life, on
such terms as are agreed with the patent holder (including the
level and/or amount of royalty) failing which such terms are
judicially determined.
The specifications and/or rights granted in relation to each
patent will vary from jurisdiction to jurisdiction. In addition, as
a result of differences in the nature of the work performed and in
the climate of the countries in which the work is carried out, not
every licensee uses each patent, and the Company does not
necessarily seek patent protection for all of its inventions in
every jurisdiction in which it does business.
Although the Company believes these patents are important to
the business of the Company, there can be no assurance that the
validity of the patents will not be successfully challenged or that
they are sufficient to afford protection against another company
utilizing a process similar to the Insituform Process. The
Company's business could be adversely affected by increased
competition in the event that one or more of the patents were
adjudicated to be invalid or inadequate in scope to protect the
Company's operations or upon expiration of the patents. The Company
believes, however, that while the Company has relied on the
strength and validity of its patents, the Company's long experience
with the Insituform Process, its continued commitment to support
and develop the Insituform Process, the strength of its trademarks,
and its degree of market penetration, should enable the Company to
continue to compete effectively in the pipeline rehabilitation
market.
In September 1989, the United States Patent and Trademark
Office issued the Company's initial patent covering the NuPipe
Process, which was followed by nine additional patent grants.
Patents covering the NuPipe Process or the materials used in
connection with the NuPipe Process have also been issued in 20
other countries. The Company intends aggressively to pursue the
remaining U.S. and foreign patent applications related to the
NuPipe Process, but there can be no assurance that any of the
remaining patents will be issued as a result of such applications,
or that any patent granted will be sufficient to afford protection
against another company utilizing a process similar to the NuPipe
Process.
The Company believes that the success of its corrosion and
abrasion protection operations will depend primarily upon its
proprietary know-how and its marketing and sales skills.
Pursuant to the Ashimori License, the Company holds the
exclusive rights to use the patents, trademarks and know-how
related to the Ashimori Products, including the rights to
manufacture and sell Ashimori Products, for substantially all of
North America. Such license currently covers seven United States
patents relating to Paltem-HL and the related PAL-Liner. In
addition, there are currently five patent applications filed in the
United States relating to the Ashimori Products.
In connection with the Ashimori License, Ashimori was paid an
initial license fee of $100,000 and is entitled to receive ongoing
royalties of 6% on Paltem-HL and Paltem-March installations and 7%
on installations of other licensed Ashimori Products, with a
royalty of 5% on sales of liners to which the installation royalty
does not apply, in each case due within 60 days of each semi-annual
royalty period. Under the Ashimori License, any non-patentable
improvements by the Company made to the licensed technology are
licensed on a non-exclusive basis to Ashimori, while Ashimori's
right to use patentable improvements made by the Company is subject
to payment to the Company of mutually agreeable royalties.
The Ashimori License extends for an initial term of 15 years
through 2009 and automatically is renewed for successive one-year
terms unless the Company gives notice of non-renewal at least 90
days prior to the end of a term. Commencing with the year ending in
September 1998, in the event annual minimum royalties are not met,
Ashimori has the right to render the agreement non-exclusive and,
in the event minimum royalties are not met for two consecutive
years, to terminate the agreement. In addition, the Ashimori
License is subject to termination in the event of specified
defaults.
Under its license from Angus (the "Angus License"), the Company
holds exclusive rights to use the patents, trademarks and know-how
related to the Thermopipe Process for the United States and Canada,
and non-exclusive rights in Mexico, France, Benelux, Spain and
Italy. Angus has the option under the license to convert the
exclusive rights to non-exclusive rights if the Company does not
meet certain minimum purchases of Thermopipe liner. The Angus
License extends for an initial term of five years and is renewable
by the Company for an additional five year term, subject to
termination in the event of specified defaults. In connection with
the Thermopipe license, Angus was paid an initial license fee of
$60,000, with two additional payments of $20,000 each due after the
end of the first and second years of the license. No further
royalties are due under the license. Under the Angus License, any
improvements made by the Company which relate exclusively to the
Thermopipe Process, and which are not derivative of the Company's
installation technology relating to other products, are licensed on
a royalty-free basis to Angus.
PRODUCT DEVELOPMENT
The Company, by utilizing its own laboratories and test
facilities and outside consulting organizations and academic
institutions, continues to develop improvements to its proprietary
processes, including the materials used and the methods of
manufacturing and installing pipe. During the years ended December
31, 1996, 1995 and 1994, the Company spent approximately $7.7
million, $7.6 million and $6.2 million, respectively, on all
strategic marketing and product development activities.
EMPLOYEES
As of December 31, 1996, the Company employed 1,497
individuals, including nine officers, 136 technical specialists and
managers, 134 manufacturing staff, 908 direct installation staff,
225 administrative personnel and 94 marketing personnel. Certain of
the Company's contracting operations are parties to collective
bargaining agreements covering an aggregate of 262 employees. None
of the Company's other employees is represented by a labor union,
although the Company's United Kingdom operation belongs to a trade
association that prescribes minimum terms of employment for
members. The Company generally considers its relations with its
employees to be good.
GOVERNMENT REGULATION
The Company and its licensees are required to comply with all
national, state and local statutes, regulations and ordinances,
including those disclosure and filing requirements relating to the
grant of licenses. In addition, the Company's licensees (including
the Company's direct installation operations) may have to comply
with building code specifications, permit requirements, and
extensive bonding and insurance requirements with regard to
installation activities as well as with fire regulations relating
to the storage, handling and transporting of flammable materials.
The Company's manufacturing facilities, as well as its direct
installation operations and those of its licensees, are subject to
state and national environmental protection regulations, none of
which presently has any material effect on the Company's capital
expenditures, earnings or competitive position in connection with
the Company's present business. However, while the Company's direct
installation operations have established monitoring programs
relating to the use of solvents in the installation process,
further restrictions could be imposed on the use of solvents or the
thermosetting resins used in the Insituform Process. The Company
believes that it is in material compliance with environmental laws
and regulations applicable to it.
The use of both thermoplastics and thermosetting resin
materials in contact with drinking water is strictly regulated in
most countries. In the United States, a consortium led by NSF
International ("NSF"), under arrangements with the United States
Environmental Protection Agency (the "EPA"), establishes minimum
requirements for the control of potential human health effects from
substances added indirectly to water via contact with treatment,
storage, transmission and distribution system components, by
defining the maximum permissible concentration of materials which
may be leached from such components into drinking water, and
methods for testing them. In February 1996, the Paltem-HL and Frepp
processes were certified by the NSF for use in drinking water
systems. The Thermopipe product also has NSF approval. The NSF
assumes no liability for use of any products, and the NSF's
arrangements with the EPA do not constitute the EPA's endorsement
of the NSF, the NSF's policies or its standards. The Company does
not currently have an NSF certified Insituform product, but intends
to submit an improved product for NSF certification.
EXECUTIVE OFFICERS
The executive officers of the Company, and their respective
ages and positions with the Company, are as follows:
Age at Position with
Name March 15, 1997 the Company
---- -------------- --------------
Jerome Kalishman 69 Chairman of the Board
Anthony W. Hooper 49 President and Chief
Executive Officer
Robert W. Affholder 61 Senior Executive Vice
President
William A. Martin 55 Senior Vice
President-Chief
Financial Officer
Dale T. Harden 56 Senior Vice President-
Chief Operating Officer
of North American Con-
tracting Operations
Raymond P. Toth 49 Vice President-
Human Resources
Joseph F. Olson 52 Vice President-Controller
of North American Con-
tracting Operations
F. Thomas Driver 59 Vice President-Technical
Sales
Robert L. Kelley 51 Vice President-General
Counsel
Jerome Kalishman has been Chairman of the Board of the Company
since November 1996, having served as Vice Chairman of the Board of
the Company from October 1995 until November 1996. Prior to the IMA
Merger and since prior to 1991, Mr. Kalishman was Chairman of the
Board and Chief Executive Officer of IMA.
Anthony W. Hooper has been President of the Company since
November 1996. Mr. Hooper was previously, since August 1994, Senior
Vice President-Marketing and Technology of the Company, having
served as Senior Vice President-Marketing of the Company from
November 1993 to that date. From 1992 until joining the Company,
Mr. Hooper was President of Huyck Formex/Weavexx Corporation, a
North Carolina industrial textile and process equipment
manufacturer and subsidiary of BTR, Inc. From prior to 1990 to
1991, Mr. Hooper was employed by Sprout Bauer, Inc., an industrial
machinery and systems manufacturer owned by Combustion Engineering,
Inc., where he was Vice President-Marketing before becoming
President of the Pulp and Paper Division.
Robert W. Affholder has been Senior Executive Vice President
of the Company since August 1996. Mr. Affholder was previously,
since October 1995, Senior Vice President-Chief Operating Officer
of North American Contracting Operations of the Company. Mr.
Affholder was President of IMA from 1994 to October 1995 and from
prior to 1991 to 1993, and was Vice Chairman of IMA from 1993 to
1995.
William A. Martin has been Chief Financial Officer of the
Company since 1988, a Vice President from 1989 to January 1993 and
a Senior Vice President since January 1993.
Dale T. Harden joined the Company as Senior Vice President in
June 1996 and became its Chief Operating Officer-North American
Contracting Operations in August 1996. From prior to 1991 until
joining the Company, Mr. Harden was employed by the General
Electric Company, serving most recently as General Manager of its
Power Generation and Apparatus Service Department.
Raymond P. Toth has been the Company's Vice President-Human
Resources since February 1994. Since prior to 1991 and until
joining the Company, Mr. Toth was employed as Director of Human
Resources for Sprout Bauer, Inc.
Joseph F. Olson has been Vice President-Controller of North
American Contracting Operations of the company since October 1995.
Mr. Olson was Vice President-Finance and Administration of IMA from
prior to 1991 to October 1995.
F. Thomas Driver has been Vice President-Technical Sales of the
Company since October 1995. Mr. Driver was Vice President-Product
Development and Manufacturing of IMA from January 1994 to October
1995. Mr. Driver was Senior Vice President-Manufacturing and
Research and Development of the Company from January 1993 to
January 1994 and its Vice President-Technical Director from prior
to 1991 to January 1993.
Robert L. Kelley has been Vice President of the Company since
June 1996, having joined the Company as General Counsel in the
prior month. Mr. Kelley was Assistant General Counsel of Monsanto
Company from prior to 1991 until joining the Company.
ITEM 2. PROPERTIES
The Company's executive offices are located in Memphis,
Tennessee, at 1770 Kirby Parkway. The Company's lease of such
premises with an unaffiliated party covers 17,885 square feet of
office space, at an annual rental of $254,868, plus taxes and
operating expenses in excess of a base amount, and expires in 2000.
The Company's North American contracting operations are based
in Chesterfield, Missouri, where the Company owns 46,000 square
feet of space on 10.5 acres, 19,400 square feet of which is
utilized as office space and the remaining 27,000 square feet of
which is used for operations.
The Company's manufacturing facilities in Memphis, Tennessee
are sub-leased from an unaffiliated entity for an initial term of
forty years expiring on December 31, 2020. The annual rental cost
to the Company during the initial term of the lease is currently
$28,956, plus real estate taxes, and increases by varying
percentages every five years to $44,952, plus real estate taxes, in
2016 and thereafter. The premises consist of 56,000 square feet of
manufacturing space, with an adjoining 6,000 square foot
administrative office complex, the cost of a portion of which,
together with certain machinery and equipment, was financed from
the sale of a $1.5 million industrial development bond and secured
by a mortgage on the premises and equipment. An additional 2,700
square feet of space added to the facility is used for research and
development.
The Company maintains 87,000 square feet of space on 20 acres
of land in Batesville, Mississippi, 27,000 square feet of which is
utilized as an Insitutube fabrication facility, 27,000 square feet
as a contiguous felt manufacturing facility, 27,000 square feet as
warehousing space, and 6,000 square feet as office space. The costs
relating to the acquisition, construction and equipping of the
Batesville facilities, in the aggregate amount of $5.5 million,
were financed from the proceeds of the sale of an industrial
development bond, which was prepaid in February 1997, and was
secured by the issuer's title to the property, which is leased to
the Company under arrangements that provide for the Company's
purchase option at (subsequent to such prepayment) nominal value.
In January 1995 the Company sold to Linings (a 51%-owned
subsidiary), for a sale price of Pound Sterling 750,000, the land and building
previously leased to Linings and comprising its Insitutube
manufacturing facility located on 1.3 acres and comprising 25,100
square feet of space in Wellingborough, England. The Company leases
additional Insitutube manufacturing space in Matsubuse, Japan.
In support of its direct installation operations, the Company
owns facilities in Ossett, England (36,250 square feet), Lemont,
Illinois (24,378 square feet), Owosso, Michigan (21,500 square
feet), Littleton, Colorado (8,000 square feet), Durango, Colorado
(10,000 square feet), Grand Prairie, Texas (9,000 square feet),
Lakeland, Florida (15,000 square feet) and Jacksonville, Florida
(25,000 square feet). The Ossett and Jacksonville properties are
subject to mortgages. The Company manages installation operations
from leased sites in the United States in Houston, Indianapolis,
Santa Fe Springs, Sacramento and Charlton, Massachusetts, Kent,
Washington, Kailua, Hawaii, Hammond, Louisiana, Opaloca, Florida,
Atlanta, Georgia, and Salem, Oregon; and in Canada in Edmonton,
Alberta, Surrey, British Columbia, Pickering, Ontario and
Vaudreuil, Quebec. The Company's contracting subsidiaries maintain
additional sales and administrative offices in the event required
by operations.
The foregoing facilities are regarded by management as adequate
for the current and anticipated future requirements of the
Company's business. Upon payment by the Company in the last quarter
of 1996 in the amount of approximately $1.26 million, the Company
terminated its lease, entered into by IGL prior to the IGL
Acquisition, of premises located in Langley, Berkshire, England,
which entailed an initial rent of Pound Sterling 245,960 per annum, subject to
adjustment every five years through 2015 based upon the open market
rent applicable at that time. The Company may seek to negotiate
termination of leases on certain additional properties in the
United Kingdom, and, in order to rationalize the Company's
operations combined as a result of the IMA Merger, to relocate
certain other operations.
ITEM 3. LEGAL PROCEEDINGS
The Company has initiated proceedings which are pending in the
United States District Court for the Southern District of Texas,
Houston Division (the "Texas Proceedings") against Cat Contracting,
Inc. et al. (Civil Action No. H-90-1690), alleging infringement of
certain of the Insituform patents in connection with conduit
relining work performed in Houston by licensees of Kanal Sanierung
Hans Muller GmbH & Co. In such proceeding, defendants asserted
counterclaims alleging both that suit was brought in bad faith, and
certain antitrust violations, and further alleging that the Company
engaged in unfair competition.
In June 1991, the jury in the Texas Proceedings rendered its
verdict finding that the competitors named as defendants had
infringed the Insituform patents at issue and that such patents
were not invalid. In the continuing proceedings, the court, in
August 1991, declined to declare such patents invalid, as was
requested by defendants, and did not disturb the jury's verdict
finding that the plaintiffs were not liable on the defendant's
counterclaims alleging that the suit had been brought in bad faith
and that plaintiffs had engaged in unfair competition. The court,
however, granted the defendants a new trial on the matter of
whether they had infringed certain Insituform patents, under the
doctrine of equivalents, setting aside that portion of the jury's
verdict, and granting defendants judgment notwithstanding the jury
verdict on the issue of literal infringement of that patent.
In October 1995, the court in the Texas Proceedings ruled that
the defendants' serial impregnation processes infringed the
Company's patent and issued a permanent injunction against
defendants' use of the processes covered by such patent and ordered
a trial on the issue of damages, the amount of which remains to be
determined. Defendants filed a notice of appeal to the United
States Court of Appeals for the Federal Circuit, and the Company
filed a notice of cross-appeal from the 1991 judgment. Furthermore,
in February 1996 defendants filed a motion with the Texas district
court for a partial new trial alleging that the Company gave
knowingly false testimony at the 1991 trial and seeking dismissal
of the action and monetary sanctions, which the Company has
opposed. The District Court has denied defendants' motion for a
partial new trial, and defendants have filed a notice of appeal
from that ruling with the United States Court of Appeals for the
Federal Circuit which is set for argument in April 1997.
In November 1996, the Court of Appeals for the Federal Circuit
affirmed the District Court in declining to declare the Company's
serial impregnation patent invalid and found that the jury's
rejection of defendants' challenge to the validity of that patent
was supported by the evidence. The Court of Appeals further
affirmed the District Court in granting defendants' judgment
notwithstanding the jury verdict on the issue of literal
infringement of the patent, and vacated the District Court's
finding of infringement under the doctrine of equivalency, holding
that the District Court had used an incorrect claim construction
and remanding the case to the District Court for new findings
regarding such issue. In December 1996, the District Court issued
its new findings under the guidelines suggested by the Court of
Appeals, and again found that both of the processes employed by
defendants infringed the Company's serial vacuum impregnation
patent. The damages portion of the Texas Proceedings are
continuing, with trial currently scheduled for mid-1997. In March
1997, defendants filed a petition for a writ of certiorari in the
U.S. Supreme Court with respect to the November 1996 ruling, which
the Company is opposing.
In October 1996, two of the defendants in the Texas Proceedings
filed a separate action (the "Additional Texas Proceedings") in the
District Court against the Company and Insituform East,
Incorporated (Inliner U.S.A. and Cat Contracting, Inc. v.
Insituform Technologies, Inc. and Insituform East, Inc. [Civil
Action No. H96-3627]) alleging, among other matters, that the
Company had commenced the Texas Proceedings with knowledge that the
Company's serial impregnation patent was invalid and gave false
testimony in the Texas Proceedings. The suit further alleges that
the Company committed various infractions of the antitrust laws,
including conduct by the Company constituting unreasonable
restraints of trade and monopolization of its market, in violation
of Sections 1 and 2 of the Sherman Act, made false or misleading
representations in violation of Sections 1 and 2 of the Sherman
Act, made false or misleading representations in violation of
Section 43(a) of the Lanham Act, and engaged in other anti-
competitive practices in violation of Texas state law, and seeks
compensatory and punitive damages. The Company has denied the
allegations and raised affirmative defenses, including collateral
estoppel, the Noerr-Pennington doctrine, and statute of
limitations, and filed a motion to dismiss regarding certain of the
antitrust claims which plaintiffs are opposing. No discovery has
been conducted in the case. A scheduling order has been entered
with trial currently set for November 1998.
In October 1996, Western Slope Utilities, Inc., which utilizes
a serial impregnation process licensed from Inliner, U.S.A., one of
the defendants in the Texas Proceedings, commenced an action
against the Company in the United States District Court for the
District of Colorado (Western Slope Utilities, Inc. v. Insituform
Technologies, Inc. and Insituform Netherlands) B.V. [Civil Action
No. 96-N-2394]), seeking, among other things, a judgment declaring
the Company's serial impregnation patent invalid, unenforceable and
not infringed by plaintiff's current activities, and injunctive
relief enjoining the Company from charging plaintiff or any of its
customers or suppliers with infringing that patent. This case has
been transferred to the United States District Court for the
Southern District of Texas and a motion is pending to have it
consolidated with the Additional Texas Proceedings. Plaintiffs
recently filed an application for writ of mandamus with the United
States Court of Appeals for the Federal Circuit contesting the
transfer order, which the Company is opposing.
In December 1996, the Company entered into settlement
arrangements with respect to two previously reported proceedings
initiated by the Company against, inter alia, Spiniello Limited,
Inc. in the United States District Courts for, respectively, the
District of New Jersey (Civil Action No. 8904174 (MTB)) (the "New
Jersey Proceedings") and the Central District of California (Civil
Action No. 95-5484 (GHK) (the "California Proceedings"), alleging
infringement of the Company's Insituform patents, among other
matters. In the New Jersey Proceedings, defendants had asserted
counterclaims alleging both that the suit was brought in bad faith,
and certain antitrust violations, and, in the California
proceedings, seeking a declaratory judgment that the subject
patents were invalid. The New Jersey Proceedings had been stayed
pending a final judgment in the Texas Proceedings. In the
California Proceedings, the court had preliminarily enjoined
defendants from infringing the Company's serial impregnation
patent, and from misappropriating various of the Company's trade
secrets. Under the settlement arrangements, the New Jersey
Proceedings have been dismissed and, in the California Proceedings,
the parties agreed to convert the preliminary injunction against
infringing the Company's serial impregnation patent to a permanent
injunction for the life of the patent, the preliminary injunctive
relief against misappropriating the Company's trade secrets was
made permanent for an agreed upon term and defendants paid an
agreed upon sum to the Company.
The Company is involved in certain additional litigation
incidental to the conduct of its business and affairs. Management
does not believe that the outcome of any such litigation will have
a material adverse effect on the financial condition or operations
of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's class A common stock, $.01 par value ("Common
Stock"), is traded in the over-the-counter market under the symbol
"INSUA". The following table sets forth the range of quarterly high
and low sales prices commencing after December 31, 1994, as
reported on The Nasdaq Stock Market. Quotations represent prices
between dealers and do not include retail mark-ups, mark-downs or
commissions.
Period High Low
------ ---- ---
1996
First Quarter $12.00 $9.38
Second Quarter 13.38 7.63
Third Quarter 8.00 6.13
Fourth Quarter 8.38 6.38
Period High Low
------ ---- ---
1995
First Quarter $13.00 $11.13
Second Quarter 14.13 12.00
Third Quarter 16.63 12.88
Fourth Quarter 14.88 11.13
As of March 15, 1997, the number of record holders of the
Company's Common Stock was 1,874.
Holders of Common Stock are entitled to receive dividends
as and when they may be declared by the Company's Board of
Directors. The Company has never paid a cash dividend on the Common
Stock. The Company's present policy is to retain earnings to
provide for the operation and expansion of its business. However,
the Company's Board of Directors will review the Company's dividend
policy from time to time and will consider the Company's earnings,
financial condition, cash flows, financing agreements and other
relevant factors in making determinations regarding future
dividends, if any. Under the terms of certain debt arrangements to
which the Company is a party, the Company is subject to certain
limitations in paying dividends. See Notes 8 and 20 of the Notes to
the Company's Consolidated Financial Statements included in
response to "Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K" and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of
Operations-Liquidity," which information is incorporated herein by
reference.
For each year prior to consummation of the IMA Merger
covered by the Company's Consolidated Financial Statements included
in response to "Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K," IMA had a policy of paying regular cash
dividends, semi-annually in January and July, at an annual rate of
$.14 per share of the class A common stock, $.01 par value, of IMA
and $.1272 per share of the class B common stock, $.01 par value,
of IMA.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below have been
derived from the Company's consolidated financial statements
referred to under "Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K" of this Annual Report on Form
10-K, and previously published historical financial statements not
included in this Annual Report on Form 10-K. In October 1995 and
December 1992, the Company consummated, respectively, the IMA
Merger and the IGL Acquisition, each of which the Company has
accounted for as a pooling-of-interests and, accordingly, the
historical financial statements of the combining companies have
been retroactively combined (after adjustments to eliminate
intercompany balances and transactions, and to conform reporting
periods and accounting methods) as if the companies had operated as
a single entity for the periods presented. Certain historical
financial data of IMA have been reclassified to conform to the
Company's accounting policies. The selected financial data set
forth below should be read in connection with "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements,
including the notes thereto, referred to herein.
Year Ended December 31,
-----------------------------------------------------
1996(1) 1995(1)(2) 1994(3) 1993(4) 1992(5)
------- ------- ------- ------- -------
(in thousands, except per share amounts)
INCOME STATEMENT DATA:
Revenues.................. $289,933 $ 272,203 $ 223,171 $ 151,622 $ 156,219
Operating costs and
expenses:
Cost of revenues......... 201,219 182,286 146,248 95,729 98,169
Selling, administrative
and general............. 60,181 55,990 41,511 34,889 29,873
Strategic marketing and
product development..... 7,689 7,636 6,180 6,878 6,303
Unusual items............. 6,498 14,541(6) -- (981) 14,572(7)
Total operating
income............ 14,346 11,750 29,232 15,107 7,302
Other income (expense)..... (4,933) (8,120)(8) (2,398) (468) 2,859
Taxes on income........... 4,985 3,987 10,457 5,159 8,907
Equity in earnings of
affiliated companies..... 441 666 570 638 1,282
Income (loss) from
continuing operations.... 4,492 (966)(8) 15,667 9,734 2,288
Net income (loss)......... 4,492 (966) 14,503 7,487 1,748
Earnings (loss) per share:
Income (loss) from
continuing operations... .17 (.04) .57 .36 .09
Discontinued operations... -- -- (.04)(9) (.09)(9) (.02)
Cumulative effect of
accounting change........ -- -- -- .01 --
Net income (loss)........ .17 (.04) .53 .28 .07
Weighted average common
and common equivalent
shares outstanding....... 27,112 26,902 27,162 27,206 24,317
BALANCE SHEET DATA:
Working capital........... 78,876 69,538 46,403 40,724 31,990
Current assets............ 130,879 120,711 106,926 81,102 67,074
Property and equipment.... 57,266 59,773 51,471 40,407 32,184
Intangibles............... 71,953 73,158 65,268 52,707 29,489
Total assets.............. 267,944 260,300 227,627 177,010 133,682
Long-term debt............ 82,384 82,813 47,347 36,297 7,675
Redeemable preferred
stock.................... -- -- -- 157 84
Total liabilities......... 139,106 137,845 110,310 77,108 43,652
Total common stock and
other stockholders'
equity.................. 123,203 116,810 114,880 100,106 90,267
___________________
(1) As a consequence of a 15% general partnership interest in Midsouth Partners held by a
subsidiary of the Company, and the consummation of the acquisition (the "Enviroq
Acquisition") of the pipeline rehabilitation business of Enviroq Corporation in April
1995, including a 42.5% interest in Midsouth Partners held by a subsidiary of Insituform
Southeast, Midsouth Partners has been consolidated in the Company's financial statements
since such date.
(2) In 1995 the Company consummated the acquisition of two-thirds of Insituform France S.A.
("Insituform France") and the Enviroq Acquisition, which have been accounted for under
the purchase method of accounting.
(3) In 1994 the Company consummated the acquisition of Gelco Services, Inc. and affiliates,
which has been accounted for under the purchase method of accounting.
(4) In 1993 the Company consummated the acquisitions of Naylor Industries, Inc. and
Insituform Midwest, Inc., which have been accounted for under the purchase method of
accounting.
(5) In 1992 the Company consummated the acquisitions of all of the assets of Pipeline
Rehabilitation Systems, Inc., the minority interest in Insituform Canada and of H.T.
Schneider, Inc., which have been accounted for under the purchase method of accounting.
(6) Reflects $6.5 million in costs associated with the IMA Merger, which have been charged
to operations primarily in the fourth quarter of 1995, and a pre-tax charge in the
amount of $8.1 million for restructuring costs, primarily for consolidation of corrosion
and abrasion protection operations, rationalization of Canadian operations to one
facility, elimination of duplicative management positions, relocation of certain
domestic employees and functions, and termination of construction of proposed
manufacturing capacity.
(7) Reflects $9.7 million in costs associated with the IGL Acquisition, which have been
charged to operations primarily in the fourth quarter of 1992, and a pre-tax charge in
the amount of $4.9 million for restructuring costs, primarily for asset-related write-
offs, lease termination provisions and personnel related costs.
(8) In 1995 the Company settled certain outstanding litigation for a cash payment of $3.2
million and issuance of 30,000 shares of Common Stock, resulting in an after-tax charge
against earnings of approximately $2.2 million.
(9) In December 1993 the Company determined to discontinue the operations of its division
engaged in the offsite rehabilitation of downhole tubulars for the oil and gas industry.
As a result, the Company recorded a fourth quarter 1993 charge to write down the
division's assets to their estimated net realizable values and to accrue for operating
losses during the anticipated phase-out period. The statement of operations and balance
sheets have been restated to reflect continuing operations. The Company also recorded
a fourth quarter 1994 charge resulting from the abandonment of efforts to find a
purchaser for, and shut down of, such division.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's revenues include construction revenues from
direct installation and other contracting activities, product sales
of materials and equipment to licensees and royalty income and
initial license fees received from licensees for the use of the
Company's trenchless rehabilitation processes. Product sales
consist primarily of sales of Insitutubes and NuPipe to licensees.
Construction contract revenue is generated by the Company's
subsidiaries operating in the United States, Canada, France, the
United Kingdom, Chile, Argentina and Mexico. Royalties and license
fees are paid by the Company's 34 unaffiliated Insituform licensees
and sub-licensees and its ten unaffiliated NuPipe licensees. During
the three years ended December 31, 1996, 1995 and 1994,
approximately 69.7%, 71.2% and 67.8%, respectively, of the
Company's consolidated revenues were derived from sales,
construction and royalty revenues related to the Insituform
Process.
Product sales and royalties are primarily a function of the
contracts performed by the Company's licensees. However, changes in
product sales may vary from changes in royalties because of several
factors, including differences between the timing of Insitutube
sales and contract performance by licensees and the accrual by the
Company of minimum royalties in excess of royalties otherwise due
on work performed. The Company's consolidated subsidiaries obtain
supplies of Insitutubes and related materials from the Company.
The Company was incorporated in Delaware in 1980 in order to
act as the exclusive licensee of the Insituform Process in most of
the United States. In October 1995, the Company consummated the IMA
Merger, which has been accounted for as a pooling-of-interests.
Under the pooling-of-interests method of accounting, the historical
financial statements of the combining companies are retroactively
combined (after adjustments to eliminate intercompany balances and
transactions, and to conform accounting methods) as if the
companies had operated as a single entity.
The Company's acquisitions in July 1993 of Naylor Industries,
Inc., the parent of Insituform Gulf South, Inc. ("Gulf South"), and
Insituform Midwest, Inc. ("Midwest"), its acquisition in October
1994 of Gelco Services, Inc. ("Gelco") and affiliates, its February
1995 acquisition of two-thirds of the interest in Insituform
France, the April 1995 Enviroq Acquisition and its November 1995
acquisition of Waterflow's FormaPipe division have been accounted
for under the purchase method of accounting, so that the results of
the acquired companies are included in the Company's historical
results of operations from the consummation of such transactions,
respectively. In addition, product sales and purchases and royalty
revenues and expenses related to intercompany transactions
occurring subsequent to the acquisition dates of Gulf South,
Midwest, Gelco, Insituform France and Insituform Southeast have
been eliminated.
Fluctuations in the exchange rates between the United States
dollar and the currencies of other countries in which the Company
operates or has licensees may have an impact on the Company's
consolidated results during the relevant reporting period. The
Company intends to manage any such foreign currency exposure in the
context of discrete commercial transactions and, when appropriate,
to offset such exposure in whole or in part by entering into
foreign currency forward contracts, in order to reduce the impact
of such fluctuations on results of operations. The Company does not
anticipate that the circumstances in which such hedging activity
would be appropriate will have a material effect on the Company's
liquidity.
RESULTS OF OPERATIONS
Year Ended December 31, 1996 Compared to Year Ended December
31, 1995
Revenues. Revenues increased 6.5% to $289.9 million from
$272.2 million in the prior year, primarily as a result of an
increase in construction revenues, offset by decreases in product
sales to and royalties and license fees from independent licensees.
The increase in revenues reflects the April 1995 Enviroq
Acquisition, including Insituform Southeast (and the consequent
consolidation of Midsouth Partners), resulting in the elimination
of the related product sales and royalty revenues. Fluctuations in
currency exchange rates of the Japanese yen, British pound
sterling, French franc and Canadian dollar to the United States
dollar negatively impacted total revenues by approximately $1.2
million in 1996.
Construction revenues increased 8.6% to $268.2 million from
$246.9 million in 1995 in part as a result of the acquisition of
Insituform Southeast (which together with the consolidation of
Midsouth Partners, contributed to construction revenues during the
entire 1996 fiscal year an aggregate of $9.9 million in excess of
the amount contributed in the prior year, subsequent to the April
acquisition), in addition to revenue increases in United Kingdom
operations which primarily reflect the acquisition of the FormaPipe
business in November 1995. Construction revenues in 1995 include
$10.2 million from the Company's water and sewer open cut
construction operations in Canada, the assets of which were sold to
certain members of management in November 1995.
Product sales decreased 12.3% to $16.4 million in 1996 from
$18.6 million in 1995 (which included pre-acquisition sales to
Insituform Southeast and Midsouth Partners). The decrease in
product sales was coupled with a decrease in sales in Japan
primarily as a result of the negative impact of the fluctuation in
the currency exchange rate of the Japanese yen to the United States
dollar by approximately $0.9 million.
Royalty and license fees decreased 19.1% to $5.4 million
compared to $6.7 million in 1995. The decrease was primarily
attributable to lower royalties collected from independent
licensees in the United States, coupled with the elimination of
intercompany royalties from recently-acquired subsidiaries. During
1996, the Company signed license agreements for Insituform in
Taiwan and for NuPipe in Germany, and recognized $0.3 million in
license fee revenue, while in 1995, the Company signed an
Insituform license agreement in New Zealand, recognizing $48,000 in
license fee revenue.
Operating Costs and Expenses. In 1996, cost of construction
contracts (which, during such year, included trenchless
installations, abrasion, corrosion and pipeline construction, and
tunnelling) increased 11.7% to $ 189.7 million from $ 169.9 million
in 1995, primarily attributable to newly-acquired licensees. Costs
of construction in 1995 included $9.4 million from the Company's
open cut operations in Canada which were sold in November 1995.
Construction costs as a percentage of construction revenues
increased to 70.7%, as compared to 68.8% in 1995, principally due
to lower margins achieved by newly-acquired subsidiaries. In
addition, there was an increase in 1996 in worldwide volume of the
Company's abrasion and corrosion operations, which carry lower
margins than those of the Company's pipeline rehabilitation
operations.
Cost of product sales decreased 8.4% to $11.0 million in 1996
from $12.0 million in 1995. The decrease was a result of decreased
product revenue. Cost of product sales as a percentage of product
sales increased to 67.2%. in 1996, as compared to 64.3% in 1995,
due primarily to a shift in the mix of products sold.
As a percentage of revenues, selling, administrative and
general expenses were 20.8% compared to 20.6% in 1995. The 1996
increase as a percentage of revenues is attributable primarily to
the Company's investment in stronger operations and sales
management, improvement in quality (ISO 9000), and focus on the
industrial market. In 1996, selling, administrative and general
expenses increased 7.5% to $60.2 million as compared to $56.0
million in 1995. This increase is due, in large part, to the
incremental costs of operations for recently acquired entities of
$1.0 million (of which $0.3 million related to incremental goodwill
and non-compete amortization). Other increases were attributable to
added personnel costs in the Company's contracting operations in
the United States, principally in the areas of industrial sales,
and operations and project management. Strategic marketing and
product development costs did not materially change between 1995
and 1996.
Unusual Items. In 1996, the Company recognized $6.5 million in
unusual items in connection with the Company's rationalization of
its contracting operations. These consisted primarily of: (i) the
write-off of certain assets associated with the use of the
Company's Paltem product line in the gas distribution main
installation market (approximately $3.6 million), (ii) charges
related to the disposition of excess facilities (approximately $1.4
million), and (iii) costs related to reorganization of North
American contracting operations (approximately $1.5 million). In
1995, the Company recognized merger and restructuring costs of
approximately $14.5 million in connection with the IMA Merger,
completed in October 1995. These included transaction costs related
to the merger of $6.5 million, which were primarily attributable to
investment banking fees, legal and accounting fees, filing fees,
and management travel costs and a charge for approximately $8.1
million relating to restructuring costs.
Other Income (Expense). In 1996, other income increased to
$1.3 million from a $1.7 million expense in 1995, primarily due to
a 1995 charge to earnings of $3.6 million during the second
quarter, as a result of the settlement of a pending shareholder
class action lawsuit which entailed a cash payment to class members
in the amount of $3.2 million and the issuance of 30,000 shares of
Common Stock. In 1996, interest expense decreased 3.1% to $6.2
million from $6.4 million in 1995, due primarily to reduced
principal and lower interest rates in 1996.
Taxes on Income. Taxes on income increased to $5.0 million
from $4.0 million in 1995 as a result of an increase of $5.8
million in income before taxes on income, offset by a decrease in
the effective tax rate to 53.0% from 109.8% in 1995. As indicated
in Note 14 of the Notes to Consolidated Financial Statements
included in response to "Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K," the 1996 and 1995 effective tax
rates were higher than the United States federal statutory rate,
primarily due to the non-deductibility of goodwill amortization
associated with the recent acquisitions, which is generally not
deductible for tax purposes. The 1995 effective rate was also
affected by certain merger costs which were capitalized for tax
purposes.
In its financial statements, the Company has reported net
deferred income tax assets of $3.0 million as of December 31, 1996.
The Company has net operating loss and foreign tax credit
carryforwards which, if fully realized, would produce future tax
benefits of $6.4 million. The realization of these benefits is
dependent on the generation of future taxable income in the
applicable jurisdictions, and the Company has recorded a valuation
allowance of $3.1 million to reduce the related net deferred tax
assets to $3.0 million. Such amounts represent the level of future
income tax benefits the realization of which, in management's
opinion, meets the "more likely than not" threshold required under
Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes". The net operating loss carryforwards ("NOLs") of
the Company's subsidiaries are summarized in Note 14 of the Notes
to Consolidated Financial Statements included in response to "Item
14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K".
Management has prepared projections that indicate that the
remaining NOLs would be absorbed prior to their expiration.
However, the Company does not believe that the future realization
of all of these future tax benefits indicated by its projections is
sufficiently assured to allow their full recognition in the
consolidated financial statements. In particular, projections of
operating results over an extended period are inherently imprecise.
Accordingly, a valuation allowance of $3.1 million has been
recorded.
The realization of the net deferred tax asset of $3.0 million
would require that certain of the Company's subsidiaries, including
ISW, Insituform Southwest, Insituform of New England, Inc.,
Insituform Technologies, Ltd. (formerly, Insituform Permaline,
Ltd.), and Insituform Technical Services Ltd., generate various
levels of annual taxable income over the respective carryforward
Periods. Management believes that it is more likely than not that
the applicable levels of taxable income can be generated. In
reaching this conclusion, management noted a number of factors,
including the following related to its domestic operations: (i) the
operations of Insituform New England were historically profitable,
the NOL carryforward was generated by a non-recurring charge
immediately prior to its acquisition by the Company and the Company
believes managerial problems experienced during 1994 and early 1995
have been corrected; and (ii) historically profitable partnership
investments held by ISW are expected to continue to result in
annual taxable income. With regard to its foreign operations,
management noted a number of factors including that, with the
exception of NuPipe Limited, the Company's United Kingdom
operations have had a history of profitability (exclusive of the
United Kingdom recession), the Company has eliminated duplicative
administrative and research and development facilities in the
United Kingdom and has also reduced managerial and other staffing
levels in the United Kingdom and the acquisition of the business
and personnel of Waterflow's FormaPipe division in late 1995 have
helped to restore volume to needed levels.
Net Income. Total revenues increased by $17.7 million, or
6.5%, in 1996 over 1995, which was offset by an increase in cost of
revenues of $18.9 million, or 10.4%, coupled with increased
operating costs of $4.2 million, or 6.6%, offset by a decrease in
unusual items of $8.0 million, or 55.3%. These factors contributed
to an increase in operating income of $2.6 million, or 22.1%. A
decrease in interest expense of $0.2 million, coupled with the
non-recurrence of the litigation loss of $3.6 million, offset by
lower other income of $0.5 million and an increase in taxes on
income of $1.0 million, resulted in an increase in income before
minority interests and equity earnings from affiliated companies of
$4.8 million. As a result of the foregoing, net income for 1996 was
$4.5 million, an increase of $5.5 million from net income in 1995.
Year Ended December 31, 1995 Compared to Year Ended December
31, 1994
Revenues. Revenues increased 22.0% to $272.2 million in 1995
from $223.2 million in the prior year, primarily as a result of an
increase in construction revenues. As discussed above, during 1995
and 1994 the Company consolidated the construction revenues of
newly-acquired former licensees, both in the United States and in
Europe (and obtained a majority interest in Midsouth Partners,
another domestic licensee) resulting in the elimination of the
related product sales and royalty revenues. Fluctuations in
currency exchange rates had an immaterial effect on revenues during
1995.
Construction revenues increased 27.4% to $246.9 million from
$193.7 million in 1994, primarily as a result of the acquisitions
of Insituform Southeast (in April 1995), Insituform France (in
February 1995) and Gelco and affiliates (in October 1994), which,
together with the consolidation of Midsouth Partners, contributed
to 1995 construction revenues an aggregate of $43.1 million in
excess of the amount contributed (by Gelco subsequent to its
acquisition) in the prior year. During the fourth quarter of 1995,
Insituform Canada completed the sale to certain members of its
management of the assets utilized in its open cut business, which
in 1995, through the date of sale, represented $10.2 million in
revenues, compared to $14.0 million for the entire prior year.
Product sales decreased 15.0% to $18.6 million in 1995 from
$21.9 million in 1994. The decrease is primarily due to additional
eliminations of intercompany sales subsequent to recent
acquisitions.
Royalty and license fee revenue decreased 11.2% in 1995 to
$6.7 million compared to $7.5 million in 1994. The decrease is
primarily attributable to the elimination of post-acquisition
intercompany royalties from Insituform France, Insituform Southeast
and Midsouth Partners in 1995. In 1995, the Company added a license
for New Zealand, recognizing $48,000 in license fee revenue, while
in 1994, the Company signed licenses in South Korea and, on a
non-exclusive basis, for Japan and Poland, recognizing $0.3 million
in license fee revenue.
Operating Costs and Expenses. In 1995, cost of construction
contracts (which, during such year, included trenchless
installations, abrasion and corrosion and pipeline construction,
tunnelling and open cut excavation) increased 29.2% to $169.9
million from $131.5 million in 1994, primarily attributable to
newly-acquired licensees. During 1995, construction costs as a
percentage of construction revenues increased to 68.8% from 67.9%
in 1994, due primarily to poorer performance of certain newly-
acquired licensees and United Kingdom operations, in addition to
the historically lower margins associated with general contracting
in the Company's Chilean and tunnelling operations. These negative
factors were somewhat offset by improvements resulting from the
Gelco and Insituform France operations, which achieved
comparatively higher margins.
Cost of product sales as a percentage of product sales
decreased to 64.3% in 1995 compared to 66.0% in 1994, while gross
margins decreased to $6.7 million in 1995 from $7.5 million in
1994. This improvement in cost of product sales as a percentage of
product sales primarily reflects a favorable year for production
quality and customer satisfaction in the United States, offset by
increases in product sales in Japan and the United Kingdom, where
margins are historically lower. In 1994, the Company had recorded
a provision of $0.6 million for certain obsolete inventories of
NuPipe.
As a percentage of revenues, selling, administrative and
general expenses were 20.6% compared to 18.6% in 1994. The increase
in 1995 as a percent of revenues is primarily attributable to
higher costs of operations at Gelco, increased focus on company-
wide quality of $0.4 million, additional legal costs associated
with litigation and intellectual property maintenance of $0.8
million, and increased costs in certain newly-acquired operations
due to management transition and additional crew management to
handle increased volume during the first half of 1995. Selling,
administrative and general costs increased 34.9% to $56.0 million
compared to $41.5 million in 1994 due, in part, to the incremental
costs of operations for recently acquired entities of $8.9 million
(of which $1.1 million related to incremental goodwill and
non-compete amortization).
Strategic marketing and product development costs increased
23.6% to $7.6 million compared to $6.2 million in 1994, primarily
due to the enhanced efforts in connection with Paltem and NuPipe of
$0.7 million. Management also expanded its strategic marketing
efforts in the industrial market in 1995, resulting in incremental
salaries and benefits of $0.4 million for additional personnel,
travel and associated costs.
Unusual Items. In 1995, the Company recognized merger and
restructuring costs of approximately $14.5 million in connection
with the IMA Merger. These included transaction costs related to
the merger of approximately $6.5 million, which were primarily
attributable to investment banking fees, legal and accounting fees,
filing fees, and management travel costs. These also included a
charge of approximately $8.1 million relating to restructuring
costs, consisting primarily of: (i) the consolidation of the
combined companies' corrosion and abrasion protection operations
and the abandonment of certain assets related to the UltraPipe
process (approximately $2.6 million), (ii) the rationalization of
certain Canadian operations to one facility in Edmonton
(approximately $0.5 million), (iii) the elimination of certain
duplicative management positions (approximately $0.8 million), (iv)
the relocation of certain domestic employees and functions
(approximately $1.7 million), and (v) the termination of
construction on IMA's proposed manufacturing facility in
Chesterfield, Missouri (approximately $1.8 million).
Other Income (Expense). Other expense increased to $8.1
million from $2.4 million in 1994, a significant portion of which
is attributable to additional interest incurred on debt issued to
fund the Company's recent acquisitions (an increase of $3.0 million
compared to 1994). In addition, notwithstanding its belief that it
had defenses to plaintiff's claims that were well-grounded in law
and fact, in May 1995 the Company entered into a memorandum of
understanding to settle a pending shareholder class action lawsuit.
Under the settlement, which has been evidenced by a stipulation of
settlement formally approved by court order in December 1995, the
Company made a cash payment to class members in the amount of $3.2
million and (in January 1996) issued 30,000 shares of Common Stock
(valued at $0.4 million). The Company recorded a pre-tax charge to
earnings for $3.6 million (after-tax effect of $2.2 million) during
1995 with respect to the settlement.
Taxes on Income. Taxes on income applicable to continuing
operations decreased to $4.0 million from $10.5 million in 1994 as
a result of a $23.2 million decrease in income before taxes on
income, offset by an increase in the effective tax rate to 109.8%,
as compared to 39.0% in 1994. As indicated in Note 14 of the Notes
to Consolidated Financial Statement included in response to "Item
14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K," the 1995 and 1994 effective tax rates were higher than the
United States federal statutory rate, which in 1995 was primarily
due to the non-deductibility of a substantial portion of the $6.5
million in merger-related costs in connection with the IMA Merger.
The additional amortization of goodwill associated with the recent
acquisitions, which is generally not deductible for tax purposes,
contributed to the increase in the rate for both years, as did the
need to provide a valuation allowance due to uncertainties
regarding the Company's ability to utilize certain current and
prior year losses in certain tax jurisdictions to offset current
and prior year profits in other jurisdictions.
Net Income. Total revenues increased $49.0 million, or 22.0%,
in 1995 over 1994, while cost of revenues increased $36.0 million,
or 24.6%, and operating costs (including merger and restructuring
costs of $14.5 million) increased $26.2 million, or 55.1%. These
factors contributed to a decrease in operating income of $17.5
million, or 59.8%. Excluding merger and restructuring costs in
1995, operating income would have decreased $2.9 million, or 10.0%.
An increase in other expense of $5.7 million, offset by a decrease
in taxes on income of $6.5 million, resulted in a decrease in
income from continuing operations of $16.6 million, or 106.2%. In
1994, the Company recognized a $1.2 million loss from discontinued
operations. As a result of the foregoing, net los